Split Among Fed Speakers Leaves September Rate Outlook Murky

  • Fed speakers give no sign of unity ahead of next decision
  • Officials are offering different interpretations of same data

Former Fed Official Stern on Fed Communication

The more that Federal Reserve officials speak, the more confused investors and economists become.

Fed Governor Daniel Tarullo repeated his cautious assessment of the economy during an interview Friday on CNBC television, while Boston Fed President Eric Rosengren argued there was a reasonable case for gradual tightening. Their remarks, ahead of the Sept. 20-21 meeting of the policy-setting Federal Open Market Committee, illustrate divisions on the FOMC that don’t help clarify what officials will decide.

“Basically, everyone is staying in their lanes,” said Stephen Stanley, chief economist at Amherst Pierpont Securities in New York. That makes it harder to gauge the implications of recent mixed data, including a below-forecast August U.S. jobs report. “The Fed has been so arbitrary in shifting rationales, it’s not systematic enough that people in my business can look at the data and be confident about what the Fed’s going to do.”

Fed hawks and doves -- those who favor an interest-rate increase and those who argue against it, respectively -- are retrenching their positions and using recent data to bolster their arguments. Hawks say consumer spending is strong, the job market has made impressive gains and keeping rates too low for too long comes at a financial stability cost. Doves say employment could progress further, inflation has only ticked up and a handful of weaker-than-expected data points bolster the case for patience.

Investors and analysts still see relatively low chance that the Fed will raise interest rates this month.

On Friday, Tarullo signaled he’s willing to be patient before deciding the economy has enough momentum to raise interest rates, while declining to rule out the chance that he and his colleagues could move before the end of the year.

“I wouldn’t foreclose that possibility,” Tarullo said on CNBC when asked about a 2016 rate increase. “It’s important for all of us, in going into each meeting, to remain open to the possibility that momentum has changed, that expectations have changed, and thus for us to change our own views.”

At the same time, he emphasized that the labor market has been basically flat and inflation has only ticked up. He acknowledged that he was viewed as a member of the “show-me” camp inside the Fed, referring to those who want to see more evidence of inflation.

Gradual Path

By contrast, Rosengren, who also votes on monetary policy this year, said “modest increases in wages and salaries seem to me consistent with tightness in labor markets beginning to appear more strongly in the wage data,” and “a failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Dallas Fed President Robert Kaplan also spoke Friday, saying that he still believes that data over the last several months have strengthened the case to raise interest rates, but the Fed can afford to be “patient and deliberate.”

While Tarullo and Rosengren’s stances aren’t new, they show that Fed voters are staying in their own camps -- dovish or hawish -- in the run-up to the meeting.

“Typically, when the Fed is going to move, they’ll all come out singing from the same page of the hymnal,” said Scott Brown, chief economist at Raymond James Financial Inc. in St. Petersburg, Florida. Still, Brown expects a rate increase in September, and noted that while Tarullo sounded dovish, he seemed on board to at least consider a rate increase.

Lael Brainard

The discord in Fed communications has caused markets and economists to place outsize importance on Governor Lael Brainard’s speech scheduled for Monday in Chicago, the final Fed appearance on the schedule ahead of the Federal Open Market Committee meeting.

Markets increasingly priced in a September rate hike after her appearance was placed on the Fed’s public schedule on Thursday, and analysts at Deutsche Bank and Evercore ISI suggested that the speech could be an opportunity to stoke market expectations ahead of a September increase.

“I’ve been stunned at the response,” Stanley said. “If the Fed needs to correct market expectations this close to the meeting, it’s got to be Yellen. Number two, Brainard has been consistently the most dovish person on the Committee. To think that she’s going to make this 180 degree turn, and be the tip of the spear in this jawboning exercise -- it’s extremely unlikely.”

Open Minded

Markets aren’t alone in wavering on what the Fed will do: officials themselves appear to be unsure of what their colleagues will decide.

“When we get to Washington, we’ll be sharing views” and “really trying to come to a view on what that means for where the economy is and what the appropriate decisions are around monetary policy,” San Francisco Fed President John Williams said Sept. 6 in Reno, Nevada. He added that he didn’t “want to have a view” on what action he’d favor in September. “When it will happen and if it will happen depend not only on what we’re seeing in the economy, but also on discussions in the committee.”

Tarullo said Friday “there’s room for a robust discussion” about what recent data mean for policy.

A clear signal from the Fed ahead of September could be too much to hope for, said Laura Rosner, senior U.S. economist at BNP Paribas in New York.

"They’re looking for one signal from the Fed -- a clear signal that’s uniform, and I don’t think that’s feasible, given the current FOMC communications framework,” Rosner said, because the Fed is “letting the meeting be the trial on the rate hike.”

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